Lenders do not look at what your credit history was prior to a particular event, in this case a deed in lieu of foreclosure. A lender will look at what your most recent credit report says about your credit history. Therefore, if a deed in lieu of foreclosure, foreclosure, or short sale appear on your credit report this will have a negative impact on your credit report, and a lender will look this as a serious negative mark against your credit. Unfortunately, I know of no lender which will lend to a borrower without taking into serious consideration the borrower's credit report. Although, you may have an excellent debt-to-income ratio, this is not the only criteria a lender uses to determine the risk involved in lending, and ultimately approving a loan. It is unrealistic that you can get another mortgage loan to purchase another home considering what you have mentioned.
I will provide you with a brief overview of a deed in lieu of foreclosure in comparison to a short sale. You may want to consider a short sale as another option in dealing with this situation.
A deed in lieu of foreclosure and a short sale are very similar but there are some key differences that depend on the details of the situation.
What is a deed in lieu of foreclosure?
A deed in lieu of foreclosure is an alternative to foreclosure. In a deed in lieu of foreclosure, the property owner gives the property to the lender voluntarily in exchange for the lender canceling the loan. The item transferred is the deed to the property. The lender promises not to initiate foreclosure proceedings, and to terminate any foreclosure proceedings already underway. The lender may or may not agree to forgive any deficiency balance that results from the sale of the property.
An overlooked downside to a deed in lieu of foreclosure is the possible forgiveness of the deficiency balance. Under federal law, a creditor is required to file a 1099C whenever it forgives a loan balance greater than $600. This may create a tax liability for the former property owner because it is considered "income." However, the Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for some loans forgiven in 2007 through 2009. See the IRS document "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation."
The key issue in a deed in lieu of foreclosure is whether the lender is willing to forgive the deficiency balance. Read the contract carefully to see how the deficiency balance issue is handled. If the document is unclear, take it to an attorney with experience in property law. An attorney's time is not cheap, but will be a bargain compared to signing an agreement you do not understand and are surprised later to realize its implications.
Here is the typical (although by no means exhaustive) list of short sale requirements: a) the residence must already be on the market for a certain number of days (90 days is typical), b) there can be no liens on the property, c) the property cannot already be in foreclosure, d) the offer of a deed in lieu must be voluntary, e) for a short-sale, the seller must have a hardship, f) the house must be priced reasonably.
Is a "short sale" a better option?
On the other hand, the property owner and lender may choose to do a short sale on the home. Through a short sale the lender agrees to accept less than the balance owed on the mortgage at sale. The deficiency balance is forgiven, typically.
However, recently Bills.com readers have reported that some mortgage companies are asking borrowers to agree to accept liability for the deficiency balance. The lesson here is if you are considering either a deed in lieu of foreclosure or a short sale you must review the terms and conditions carefully and make certain you understand whether the deficiency balance is forgiven.
Unlike a deed in lieu of foreclosure, the ownership of the property is not transferred to the mortgage holder, and remains with the owner.
Some lenders choose short sales because they do not want to own the distressed property. They would much rather see the owner sell the property and lose the deficiency balance than be forced to take the property through foreclosure, as foreclosure is a costly and time-consuming process.
Whether the lender picks a deed in lieu of foreclosure or a short sale depends on how the lender balances its risks and how it wants the distressed properties to appear on their books. Local laws may have an impact on the decision, too.
One last point regarding short sales: Like deeds in lieu of foreclosure, a lender is required to file a 1099C if the debt forgiven exceeds $600. As mentioned in the deed in lieu of foreclosure section above, The Mortgage Forgiveness Debt Relief Act offers former homeowners relief for forgiven debt.
I urge you to consult with an attorney experienced in bankruptcy law to understand all of your options to resolving your mortgage debt.
I hope this information helps you Find. Learn & Save.